M&A valuation practice problem
On January 5, 2012, Global Shipping Corp (GLX) made an acquisition bid of $125 per share for all of Redwoods Packaging Inc (RWP) equity.
Analysts forecast RWP’s income statement and balance sheet information to be as follows.
(in million $)

Actual
2011
2500
2000
80
420
60
360

2012
3000
2400
100
500
70
430

Projected
2013
3500
2800
140
560
80
480

2014
4000
3200
160
640
90
550

Steady
2015
4500
3600
180
720
100
620

Current assets: Cash
Current assets: Other
Net fixed assets
Total assets

50
540
1400
1990

100
560
1500
2160

110
550
1700
2360

120
570
1900
2590

150
600
2000
2750

Current liabilities
Long term debt
Shareholders equity
Total liabilities and equity

500
600
890
1990

520
660
980
2160

540
670
1150
2360

560
680
1350
2590

600
700
1450
2750

Year
Sales
Costs
Depreciation
EBIT
Interests and taxes
Net income

Other information for RWP as of December 5, 2011
Common Stock Price
Common Shares Outstanding
Marginal Tax Rate

$100 per share
40 million shares
40%

Analysts forecast that starting from 2015, RWP’s free cash flow will settle to a growth rate of
3% per year indefinitely. They believe that RWP aims to keep the current debt ratio constant in the future. The Weighted Average Cost of Capital (WACC) of 8% is the appropriate discount rate for RWP.
Analysts identify 10 following recent mergers and acquisitions that they believe to be appropriate to value the acquisition of RWP by GLX. Analysts conclude that they will rely on the average (mean) “Enterprise Value / EBITDA” to value RWP using the “valuation multiple” method, and on the average (mean) “Merger Premium” using the “comparable transaction” method. Merger premium is defined as the offer price per common share outstanding divided by the target firm’s stock price four weeks before the merger announcement. Analysts also include all merger synergies in their cash flow forecast (presented in the above income statement and balance sheet) and valuation multiples (presented below).
Effective date

Acquirer

Target

Dec 15, 2011
Aug 20, 2011
May 08, 2011
Mar 01, 2011
Jan 16, 2011
Nov 22, 2010
Oct 19, 2010
Sep 11, 2010
Jul 29, 2010
Apr 30, 2010

Southern Fe Inc
Arson Electric
Turin Global
New Exploration
Ceva Logistics
Texas Atlantic
IE Intercontinetal
Gator Express Inc
Navaho Maritime
Independent RPS

Wind Spring Sys
Evocent Corp
Carrier Access
Zoro Producing
IGL Corp
Eloris Int’l Co
Transamerica Inc
Pan American
Trans-Barracuda
Ocean Pier II Inc

EV / EBITDA
13.03
13.66
12.32
13.13
10.63
9.96
11.45
8.56
11.89
8.77

Merger premium
28.55%
30.78%
27.99%
28.66%
24.78%
22.55%
26.77%
21.75%
26.22%
21.95%

Question: Value RWP using the discounted cash flow method, the valuation multiple method, and the comparable transaction method, and assess whether GLX’s bid of $125 per share for RWP’s equity is a reasonable